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Portfolio Rx: me & my gal
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August 9, 2001: 9:56 a.m. ET
A single dad with an infant daughter plans for retirement, college tuition
By Staff Writer Alexandra Twin
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NEW YORK (CNNfn) - Even though they are more than a generation apart, Mike Huey, 45, and his daughter, Susie, 1, have a lot in common. They both like to go to the park. They both like to go to the aquarium. They both like to sing off-key to Susie's favorite lullaby tapes. And in 17 years, they will both be embarking on major life changes at the same time.
Like many people who become parents late in life, Mike Huey will be retiring at the same time his daughter Susie will be starting college. And as a single parent, Huey will have to plan for these two momentous occasions by himself.
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 MIKE'S OTHER DEBTS
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Home equity loan balance of $50,000 at a 9.5% APR
Equity monthly payment is $500
Daycare is $1,100 a month
Credit card balance is $6,000; payment is $350 a month
Car loan balance is $14,000
Car loan payment is $550 a month
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Huey works as a director of maintenance for a private business jet owner, earning approximately $110,000 a year. He's saved a little more than $100,000 in a combination of IRAs, a 401(k) and an individual account.
He pays $2,500 a month toward the $270,000 he owes on his mortgage. The mortgage has an adjustable rate of 7 percent, which expires in 2002. He estimates his house to be worth about $375,000. His other monthly debts can be found in the chart to the right.
Huey is concerned about the debt, but is more concerned about saving. He maxes out his 401(k) with $10,500 a year, but wants to save more. He wants to make a good choice about life insurance. He's concerned that his 27 mutual funds are far too many and that they may overlap one another.
Huey would like to retire on time at 62. A fan of golf and photography, his retirement daydream involves both. He'd like to take a photography class, buy a camera and an RV and go visit and photograph Jackson Hole, Wyo., Yosemite National Park and all the other great wonders of the West, golfing along the way.
He'd also like to have enough to fund Susie's college expenses.
At one, she is just starting to walk. "She's a bit wobbly," Huey said, talking over the phone from his office in the Pacific Northwest, "but she's very eager."
Portfolio Rx is a CNNfn.com feature that looks at issues like portfolio diversification and asset allocation. In each article, we review a reader's investments and ask financial experts for advice.
Financial planners who reviewed Mike Huey's portfolio said he has done an admirable job of choosing funds, but that he is carrying too heavy a debt load to save as aggressively as he needs to.
Ron Pearson's Rx
"He needs to maximize his savings for his own retirement as well as his daughter's education, yet his debt is absorbing 43 percent of his monthly income," said Ron Pearson, a certified financial planner from Virginia Beach, Va., and a member of the financial planning association.
His credit card and auto debt are not tax deductible. And in addition, he has substantial losses in his taxable portfolio, namely his individual account, Pearson said. Huey estimates that he has lost 50 percent to 60 percent in the last year.
Pearson's first recommendation is that Huey liquidate his taxable portfolio. This would enable him to capture tax losses and use the proceeds to pay off the credit card debt and auto loan. This assumes that the interest rates on these are higher than Huey's home equity rate of 9.5 percent.
By doing this, he'll be able to cut his monthly debt payments to less than a third of his salary, realize capital gains losses of $10,000 to $15,000 and free up $900 per month. Pearson sets Huey in either the top of the 28 percent bracket or the bottom of the 31 percent bracket, enabling him to realize between $2,800 and $4,600 in tax savings.
He might want to consider refinancing his home now while interest rates are low, rather than take a risk that rates might rise by next June, when his rate expires. One option might be to roll both his mortgage as well as his home equity loan into one loan and reduce his house payments.
Huey should start a Roth IRA where he can begin contributing $3,000 starting next year.
"If he saves a total of $15,000 per year, assuming an 8 percent rate of return, he should have more than $1 million by the time he's 65, or even more if he can earn a higher rate of return," Pearson said.
Huey was concerned about the number and quality of his fund choices. Pearson said that while 27 funds in a $110,000 portfolio is high, Huey has chosen "quality funds in a well-diversified portfolio that earned 9.3 percent (all accounts) in the last 12 months, whereas the S&P 500 lost 14.8 percent."
Pearson said that a well-diversified portfolio should have (depending upon risk) assets in Large-Cap Growth and Value, Mid-Cap Growth and Value, Small-Cap Growth and Value, International, Emerging Markets, and one to three bond funds. "Therefore, a portfolio with 10 or even 15 funds is not uncommon."
Pearson suggests that in his 401(k), Huey get out of Gabelli Growth (GABGX: Research, Estimates) and move that money to Royce Low Priced Stocks (RYLPX: Research, Estimates). As for future allocations, he suggests that he put at least 10 percent of his funds in international funds.
Pearson said that all three international funds available in his 401(k) – Artisan International (ARTIX: Research, Estimates), Pilgrim International Value A (NIVAX: Research, Estimates) and Oppenheimer Global A (OPPAX: Research, Estimates) – are performing well.
Planning as a single parent
Huey needs to address guardianship issues for Susie. He needs to create a living will and make provisions for Susie's custody and for his assets, in the event that he becomes unable to attend to either, said Barbara Steinmetz, a certified financial planner in Burlingame, Calif., and a member of the financial planning association.
A revocable living trust or a durable power of attorney might accomplish this. Disability coverage to protect his ability to work until age 65 also is a necessity.
Huey needs life insurance as well. While all families need this, the need is greater when the child is an infant, as is Susie. Steinmetz said Huey needs a 20-year term policy. Pearson said the policy should have a face value of at least $1 million.
While all families should have emergency funds stashed away, both planners state the need is especially strong in single-parent households. They both advise Huey to start building up a three-to-six-month stash.
In planning for Susie's college tuition, Huey's best bet is to set up either an education IRA or a 529 plan.
Pearson likes the education IRA. It allows for contributions of up to $2,000 annually starting in 2002. It has flexibility, since the new tax law allows money to be spent on computer technology, Internet access or K-12 expenses, in addition to college costs. So if Huey decides to put Susie in private school, as he has been considering, he can use some of this money toward that goal.
Within this kind of IRA, Pearson suggests Huey invest in Dodge & Cox Balanced (DODBX: Research, Estimates) fund, which he says has a 10-year average return of 13 percent and no losing years in the last ten.
Steinmetz prefers the state-sponsored 529 plan, which allows for money to grow tax-deferred until it's withdrawn for education payments. The holdings are then taxed at the child's rate. The amount varies state-to-state. As of 2002, withdrawals will be exempt from federal tax.
On a more practical level, Steinmetz reminds him to make sure he has a person in his life, maybe a relative or friend, who can be an emergency back-up for him on a day-to-day basis, should there ever be a last-minute problem with nursery school or some other kind of unexpected emergency. All families should have this, but it's particularly important with single parents.
And finally, both planners agree, he should commend himself for already having done such a good job of getting his finances in order and for being on a good path for the future – a tough thing to do with two parents planning, let alone one. 
* Disclaimer
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